Pasha Corporation produces motorcycle batteries. Pasha turns out 1,400 batteries a day at a cost of $7

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Pasha Corporation produces motorcycle batteries. Pasha turns out 1,400 batteries a day at a cost of $7 per battery for materials and labor. It takes the firm 22 days to convert raw materials into a battery. Pasha allows its customers 40 days in which topay for the batteries, and the firm generally pays its suppliers in 30 days.a. What is the length of Pasha’s cash conversion cycle?b. At a steady state in which Pasha produces 1,400 batteries a day, what amount of working capital must it finance?c. By what amount could Pasha reduce its working capital financing needs if it was able to stretch its payables deferral period to 33 days?d. Pasha’s management is trying to analyze the effect of a proposed new production process on its working capital investment. The new production process would allow Pasha to decrease its inventory conversion period to 17 days and to increase its daily production to 2,400 batteries. However, the new process would cause the cost of material sand labor to increase to $12. Assuming the change does not affect the average collection period (40 days) or the payables deferral period (30 days), what will be the length of its cash conversion cycle and its working capital financing requirement if the new production process is implemented?

Cash Conversion Cycle
Cash conversion cycle measures the total time a business takes to convert its cash on hand to produce, pay its suppliers, sell to its customers and collect cash from its customers. The process starts with purchasing of raw materials from suppliers,...
Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
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Fundamentals of Financial Management

ISBN: 978-1337395250

15th edition

Authors: Eugene F. Brigham, Joel F. Houston

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